Regulating because other countries do

Since the early 1990s New Zealand has a banking and financial system that was pristine, unfettered by restrictions and regulations: banking was open entry with any kind of entity (company, trust, building society, partnership* etc. there were no particular corporate governance requirements for banks or deposit acceptors, banks were free to set their own financial policies including capital and reserve ratios and there was no deposit insurance or statutory preferences in favour of either New Zealanders or depositors ahead of other kinds of creditors. There was a deliberate government policy of competitive neutrality between different kinds of financial institution such as building societies, companies, incorporated societies, partnerships and so on.


In the same way financial advisers were unregulated: anyone could provide financial advise or accept and place investment money with investment providers. Issuers of securities to the public were regulated by the Securities Act, which primarily focused on audit,disclosure and registration of financial information and offer documents, a fairly limited set of requirements. The Companies Act and the Building Societies Act were gutted of all entity level restrictions and left to run their own financial policies and offer documents according to their own needs and not specific legislative requirements, although for some reason Credit Unions remained with some structural restrictions, but Credit Unions are a very minor part of the financial scene in New Zealand. Anyone could even carry on the business of providing a securities exchange or securities trading facility or platform.

What regulation there was was minimal and light handed: insurers were required to deposit a paltry $500k with the Public Trust, futures dealers require authorisation from the Securities Commission, Banks could be regulated by the Reserve Bank as a 'registered' not licenced bank. Insurers who offered general and disaster insurance were required to have and disclose a credit rating from an approved rating organisation.

The result was that, overall, financial services and financial products and providers evolved freely and naturally, financial risks were managed by those who would bear them, and should things go wrong creditors were required to take their losses.

In the last few years the government has been pushing regulatory solutions in search of problems to solve. Financial advisers would have to be registered or licenced (it is the same thing if its compulsory). Deposit accepting financial institutions would have to be licenced and supervised by the Reserve Bank, who could impose liquidity requirements in addition to capital requirements (presently it cannot impose this first requirement on registered banks). And today it was announced that bank deposits would have some sort of guarantee or insurance by the government. Why? not because it was a good idea, a solution calibrated to solve a problem, but because other countries regulate we should! The horror! fance being deregulated when other countries are regulated!

Well, I can't anymore hold out New Zealand as an example of modern day free banking and a deregulated financial services environment. Now we're just like everyone else: entry regulated, prudentially supervised, and with government itself backstopping financial institutions and/or their creditors.

*other than the 'special partnership' but these, like the restriction on their use for banking or insurance was so outdated to be irrelevant, and when these were replaced with the limited partnership that didn't have this restriction